Treatment of Call in Arrears on Redemption of Preference Share

The fully paid up Redeemable Preference shares can be redeemed and if there is calls on arrears on some shares then following treatment is made for such type of shares:

(1) Transfer full nominal value of Red. Preference shares (whether fully or partly from Revenue profits to capital Redemption Reserve account if no fresh issue is made. If fresh issue of shares is made then remaining balance (Difference of nominal value total shares partly or fully paid and fresh issue of shares) will be transferred to Capital Redemption Reserve account.

(2) Redeem only those shares which are fully paid up because as we know partly paid up shares can only be redeemed when the call money is collected.

(3) At the time of due entry premium on redemption account will be debited with the premium due on fully paid up shares but will be credited i.e. written off (from Securities Premium Account or Profit & Loss account) With the premium to be paid on total preference shares (fully as well as partly paid up).

(4) As a result of third step there will be the credit balance in Premium on Redemption account. So that will be shown on the liability side in the balance sheet till remaining partly paid up shares are redeemed.

(5) It is important to note that in respect of partly paid up shares also (on which calls in arrears are due), full capital Redemption Reserve will be created but these shares will be redeemed only when the call money is collected.


(Call in arrears, B/S). The following is the balance sheet of SAN Ltd. as on Dec. 31. 2010.


On Jan. 1 2011 Co. sold the investment at book value and also the preference shares are redeemed at a premium of 5%. Journalize the transaction and also prepare the balance sheet.

Solution: Journal

Proforma Applicable before 1-4-3011 Balance Sheet

Proforma Application from 1-4-2011: Balance Sheet of SAN Ltd as on 31-3-2012Working Notes:

1. As securities premium balance is not available is balance sheet, hence premium on redemption is provided out of profit and loss account.

2. It is not specifically mentioned to redeem both classes of preference shares, hence partly paid category has been ignored for redemption purpose.

3. As calls in arrears are there, hence according to treatment for calls in arrears, full amount is provided but while making amount due and amount paid, these shares have been ignored.

4. Those shares on which calls were in arrears will be shown in balance sheet along with calls in arrears amount.

5. Premium on redemption is provided on all the shares (including those of calls in arrears), but while making amount due, less amount is provided. So, there comes difference in this balance, which is treated as liability under the heading “Current liabilities and provisions”.

Submitted by : Professor Molly, Category : Share